Activist Investors Set Their Sights On Bill Gates

That some investors are reportedly calling for the ouster of Microsoft (Nasdaq:MSFT) Chairman Bill Gates isn’t as much of a surprise as the fact that it took so long for people to do it.

Gates, one of the richest people in the world, has kept his distance from the Redmond, Wash. company since the beginning a decade, allowing his chosen replacement Steve Ballmer to bask in the spotlight while he focused on his philanthropy. Under Ballmer’s leadership, Microsoft has floundered. Many have criticized him for being a day late and a dollar short to most of the major technology trends of over the past few years. In fact, Ballmer wrongly boasted that there was “no way” that the Apple (Nasdaq:AAPL) iPhone would get any significant market share. He just couldn’t foresee a world without personal computers.

“He completely missed the importance of the touch-screen phone,” noted David Pogue in a New York Times column in August. “He missed the importance of the tablet, too.”

Complaints about Microsoft from investors have been voiced on CNBC and other financial media outlets for years. The company’s planned $7.15 billion acquisition of Nokia’s (NYSE:NOK) device business has reportedly angered shareholders even further. Activist investor ValueAct, which led the charge against Ballmer, reportedly wants the company to focus on cloud services and business software and not consumer technology, according to Bloomberg News.

And where has Gates been during this time of upheaval? That’s hard to say. He has been selling about 80 million shares per year in pre-planned sales. Though Gates remains the largest individual investor in Microsoft, owning about a 4.5% stake, that is a fraction of the 49% position he had before the software giant went public in 1986. Gates promised to work with the board to find the company’s “next great CEO.” Ballmer certainly isn’t being rushed out the door. His “retirement” is effective in 12 months.

As Reuters noted, three major shareholders want Gates to step aside as Microsoft chairman. While the aims of the Bill and Melinda Gates foundation are certainly noble, Gates’ focus hasn’t been on Microsoft’s investors. Shares of Microsoft have risen more than 20% over the past decade, underperforming rivals such as Apple (Nasdaq:AAPL)(which gained 4,236%) and Oracle (Nasdaq:ORCL), which is up +178%, as well as the S&P 500, which edged ahead by more than 68%. Even IBM (NYSE:IBM), whose inability to foresee the PC revolution help lead to Microsoft’s birth, has done better, gaining more than 102%.

Though some pundits have argued that Microsoft needs Gates now more than ever, their arguments are not persuasive to some shareholders. As Todd Lowenstein, a portfolio manager at HighMark Capital, which holds Microsoft, recently noted to Reuters, Gates should have step aside long ago.

“Replacing the old guard with some fresh eyes can provide the oxygen needed to properly evaluate their corporate strategy,” the news organization quotes him as saying.

Though Microsoft is cheap, especially for a tech stock, trading at a price-to-earnings multiple of about 13, this is a classic value trap. The company’s dividend, which yields 3.3%, isn’t a good enough reason to buy the stock. Whomever replaces Ballmer, and perhaps Gates, has tough road ahead of them.

Bottom Line

Activist investors are feeling that Microsoft is increasingly irrelevant in the modern world, which is why it's imperative for the board to bring in new leadership to guide the company in the post-PC era. Bill Gates' moment has past.